Our China Capital Flow Tracker: China’s capital outflows stable but FED impact looming

·        Natixis China Capital Flow Tracker indicates that capital outflows in Q4 2017 should be slightly larger than in the last quarter. The overall capital outflow conditions are still relatively small and stable, but with a higher portion denominated in the RMB. Based on November data, capital outflows for the whole quarter will amount to 92 USD billion (27% of which in RMB).

 ·        The Fed raised its benchmark interest rate in December. The process of normalizing monetary policy in the US means China’s capital outflows could increase if the yield differentials widen and put downward pressure on the depreciation of the RMB against the USD. It should also be noted that a stronger USD has a negative valuation effect on China’s forex reserves, which could even change the current upward trend in reserves. Given their increasingly important signaling effect, such development could create further pressure for outflows.

 ·        Outflows from China to purchase Hong Kong registered funds increased in November. However, the scale of sales of Chinese funds under the fund mutual recognition scheme was not enough to offset such outflows (i.e. Chinese investors buying funds registered in Hong Kong). Therefore, all in all, there were still net outflows from China as far as fund-related investment is concerned.

 ·        For the total of stock connects, net capital outflows (i.e. Southbound minus Northbound) has further increased in November to 2.8% of total turnover (excluding derivatives) in Hong Kong.

 ·        The rise in foreign bond holdings decelerated in November at a pace of 0.14%MoM, reaching 1.78% of outstanding bonds. Treasury bonds continue to be the key driving force but at a much slower pace than last month. The contribution of the once surging holdings on the negotiable certificate of deposits (NCDs) has turned negative, which may reflect increasing regulatory difficulties that Chinese banks have to issue such paper under the PBoC macro-prudential assessment (MPA).

 ·        Net non-financial FDI was in negative territory as outward investment surpassed inward investment, although both surged in November. We expect the lagged data in financial net FDI to maintain the upward trend with China’s announcement that it will further open its financial sector to foreign ownership.

For full report available for journalists, policy officials and Natixis clients